Investment Incentives Matter for Industry Development and Jobs generation

With rising globalization and  economic integration through free trade agreements, competition for foreign direct investments has heightened. Even within regional groupings like the EU and ASEAN, countries compete and reinforce their tax and other incentives to attract and influence the decisions of investors especially if all the basic infrastructures and investment climate are relatively similar to each other.  In countries like Thailand and Vietnam, investment incentives contributed to achieve rapid growth. Developing countries would even increase incentives to make up for certain infrastructure handicap or disadvantages.

As DTI Undersecretary Ceferino Rodolfo said, “Not all incentives are wasted, not all incentives are bad.  Incentives are able to attract investments into the country which would not have come in considering the advantages of other countries in terms of infrastructure, cost efficiencies, labor costs or resource availability. Incentives can help compensate for the disadvantages in locating in our country.”

Usec Rodolfo added “At this point, and following President Duterte’s mission to make lives of the Filipinos comfortable, we need all the jobs we can generate, to help uplift their lives out of poverty.

“Investors who have availed of incentives have likewise paid revenues on other tax dues coming from their operations.  Taxes were paid such as on withholding taxes from salaries, VAT, real estate taxes and the net effect is positive revenue contribution to the government”, Rodolfo said.

Based on TIMTA data from 2015 to 2017, the top ten PEZA enterprises paid total taxes of P45.3B while income tax incentives availed amounted to P45.1B resulting in a net revenue position of P0.2B.  Their exports which accounted for 22% of the country’s total reached US $40.7B in the same period. Their local purchases totaled P110.1B. In the same period, number of workers per year averaged 165,300.

Rodolfo cited that one high-tech electronics company posted a cumulative net tax revenue of P3B during its presence in the Philippines from 1981-2018, as its total taxes paid stood at P5.2B versus its income tax incentives availed of P2.2B.  During the period, exports totaled $3.9B, local purchases of P22.2B, salaries and wages paid amounted to P67.6B while employment expanded from 3,378 workers in 1990 to 24,222 in 2018, just for that company.

According to Rodolfo, in terms of BOI income tax holiday, companies also contribute revenues to government in the form of other taxes paid and the ratio is around 1:4.7 or for every one peso incentive, the companies pay around P4.70 for other taxes.   In 2017, the BOI Total Incentives Availed was Php27Bn; but Total Taxes Paid was Php128Bn. More importantly, BOI incentives are time-bound. After 4yrs, there is no foregone revenue but the Tax Payments continue on.

Based on the above, Rodolfo concluded that “incentives do not all result in leakages.  They definitely result in investments, job creation, expansion of domestic capacities and Net positive revenues to government.  So let us manage the transition period better.”

He reiterated the DTI Secretary’s position that “We are for the tax reform proposal especially in making the incentives timebound but we have to carefully manage the transition, and not rush the cutting of incentives such as the 5% GIE that we promised to the PEZA locators. Affected exporter-locators have expressed concern that the change in the system may compel them to redirect their expansion plans elsewhere and even risk the possible transfer of their current operations to other countries.  There is a risk and we should minimize all the risks as we need all the jobs we can generate.

We should therefore be careful in the transition for those who are 100% exporters and labor intensive and are paying more than what they receive in terms of incentives. We also need to take into account innovative companies that are upgrading their products and moving up the value chain along with companies whose activities address gaps in and whose operations are crucial to the supply or value chain or activities that would increase competition in the domestic market.”

Specifically we should consider a 5-10 year range of transition.  In the meantime, the GIE can also be brought up to 8% so there can be an immediate additional revenue that can help balance the planned reduction in Corporate Income Tax.

DTI: New Technologies Will Not Lead to Job Loss but Will Bring in New Types of Jobs, Better Productivity

Trade and Industry Secretary Ramon Lopez dispelled fears over possible job losses due to the emerging new technologies in various industries.

"Technology leads to innovation and new approach in doing things. It won’t always lead to loss of jobs but rather provide opportunities for the industry to increase productivity and introduce new high-paying jobs for Filipino workers. We should welcome it and be ready to adapt to this phase of industrialization. In fact, continuous innovation is needed if companies are to remain competitive," said Sec. Lopez.

The Department of Trade and Industry (DTI) chief acknowledged technology is essential to improve efficiencies, and productivity.  He also noted that upskilling is an important adaptive strategy for Filipino workforce to remain in demand in any type of business.

"People will have to be upskilled and retrained to upgrade their current skills and acquire new ones to remain relevant.  There are current programs integrating new skillset requirements with schools and training centers to prepare the students and the current workforce. Many companies also provide upskilling and retraining programs as well as apprenticeship opportunities," shared Sec. Lopez.

The trade chief emphasized that technology change is not just happening now as there have been different periods of industrialization-- from the first to the fourth Industrial Revolution-- where forms of jobs changed but the human labor market remained relevant and needed. This started with manual labor to produce things, leading into the advent of mass production and concepts of having production lines where workers learned how to run and work with machines.

Sec. Lopez underscored that when people worked with machines, jobs were not lost as it opened other areas of employment such as manufacturing, servicing, and maintenance of machines.

He cited the entry of automated teller machines (ATMs) in banks as an example, noting that there was a fear back then that bank tellers would lose their jobs. As of today, bank tellers are still present and needed with more value added functions, focusing on account management and customer service. Jobs were not lost since the ATMs also serve the transaction needs of customers 24/7, beyond office hours and tellers were not performing these tasks anyway. Thus, the use of ATMs provided greater customer service and better productivity.  Sec. Lopez added that the loading of cash in each ATM as well as its maintenance still require human labor.

The coming of internet and connectivity brought a lot of new opportunities in e-commerce, more buyer-seller platforms such as Airbnb, eBay, Grab, and tons of opportunities such as Youtube-ing, in game development and gaming, digital advertising and networking.

"The case of ATMs is the same with the advent of robots and mechanization, which usually perform repetitive, dangerous or high-precision jobs.  Humans are still needed to design, manufacture, program or train the system software and maintain the robots" Sec. Lopez added.

In the era of Artificial Intelligence (AI), chatbots and data analytics, the trade chief said that new skillsets are required. Many things are happening and bound to change. Some systems are now AI-enabled, making the jobs of people easier. But people are also the ones developing and maintaining the AI systems.

Upon consultation with AI industry experts, Dado Banatao and George Yang of AI-Pros, the DTI Secretary noted that the use of AI in the Business Process Outsourcing (BPO) industry is a win-win for both the industry and Filipino workforce. While AI is cost-effective for completing multiple tasks faster and with less error, it will also allow the human workforce to increase their competitiveness in performing tasks ranging from simple to complex within the same timeframe, which are high-value and high-paying tasks.

"By combining the sizeable Filipino workforce possessing the appropriate skills and talents with AI-powered technologies, the Philippines will be poised to be the AI-driven BPO capital of the world," said Sec. Lopez.

“We are now seeing people in the BPO industry operating AI-enabled systems, where previously rejected job seekers in BPOs are now finding themselves with more job opportunities to do simpler tasks in operating AI-enabled systems. We’ve seen BPO operations in Manila where AI and chatbots are the first line of contact of clients. However, these were managed by a human operator, who is also now capable of managing two or three simultaneous calls attended by the AI-enabled system,” shared the trade chief.

According to George Yang, AI also widens the reach of opportunities to the underprivileged, citing that even high school graduates, market workers, or street vendors can be trained to operate AI-enabled systems. The most vital requirement is just the ability to understand and speak English, which Filipinos are very good at.

"Such is an example where technology can even make the opportunities more inclusive.  Yes, there are challenges but there are more opportunities. Our education and training systems, including TESDA, are now offering training programs to enable our workforce to catch up on the new job trends and prepare them for the ever-changing technology. But we're confident that we can achieve this goal of creating job and employment opportunities that are more inclusive even in the future,” Sec. Lopez concluded.